This Man Is Putting Millions In Startups' Pockets -- And Scaring VCs To Death

Pascal-Emmanuel Gobry, provided by

Published 4:00 am, Friday, March 4, 2011

AngelList is turning Silicon Valley upside down. It's basically Match.com for startups and business angels, and startups are raising millions from angels on the site almost every day, leaving VCs to scramble for dealflow and paying higher valuations.

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So we had to have a chat with AngelList co-founder Naval Ravikant. A serial entrepreneur and angel investor, Ravikant and his partner Babak Nivi gained a huge following among entrepreneurs with their blog Venture Hacks, which explains to founders how to "hack" the venture capital fundraising process. Outside of a single tweet, this is the first time Ravikant has publicly responded to the controversy.

AngelList, Ravikant told us, is the continuation of that vision -- the "product version" of Venture Hacks.

He also sent us screenshots of the AngelList dashboard from which he can see, pretty much, all of the early stage funding activity going on in Silicon Valley.

Here's the summary:

AngelList is a matching service for entrepreneurs and early stage investors.

Over 200 companies have gotten funded so far; one or two are raising money every day.

It's not just web and Silicon Valley startups anymore: plenty of sectors and plenty of locations.

Yes, there's a bubble in seed-stage investing, but it's a small bubble.

AngelList is threatening to VCs who don't have proper differentiation, but it's awesome for entrepreneurs and investors who know how to use it.

Naval Ravikant: AngelList is a matching service for entrepreneurs and investors. We try and get every company that should be funded, get funded, quickly and on market terms. It's free and open.

SAI: Some figures? How many companies are on it, how many have raised money?

Ravikant: Almost 1,300 investors - about 60% angels and 40% VCs who do seed and series A. Dozens of companies apply every day. Usually the top one or two companies every day raises some money from the list. We can't accurately track how much money is raised because we aren't in the financing, we simply introduce them.

SAI: Wait -- one or two companies raises money EVERY DAY?

Ravikant: Yes. Our rough estimate is over 200 companies funded. We're a well kept secret. It's a passive channel, like Twitter. So investors are under no pressure to take an intro. So we find that a very high percentage of intros turn into investment offers, as much as 25%. So right now about 236 companies have gotten more than 10 intros, so we assume most of those raised some money. They also self-report on Quora here and here.

SAI: Ok, so you curate the companies and investors who get in, right?

Ravikant: Any company can apply and choose who it's visible to, and it will show up immediately inside the site. We screen the angels, because lots of people who aren't really active angels try and get in to snoop around.

SAI: Is AngelList just web/tech focused? How about geography?

Ravikant: Mostly web, although we've recently sent out and hopefully helped a sneaker company, a beverage company, etc. I'd say they all have to be "product" companies, not just tech. We get and send out solar, fuels, biotech… And the geography is global. Web is still 70% but shrinking since we're getting more non-web companies coming in and more non-web investors.

SAI: Ok, so how did AngelList get started?

Ravikant: We tried it a few times before. Nivi and I were co-authoring Venture Hacks, and teaching entrepreneurs how to raise money, and AngelList is the product version of Venture Hacks. We tried it a few times and got it wrong. This is roughly our third or fourth attempt.

SAI: What were the previous attempts like? What did they lack?

Ravikant: Execution, focus, connections, and timing. Execution in that we built them wrong. We didn't thoroughly understand the market. Once I'd been an angel myself for a few years, I got it. Focus because we weren't all full-time on it. Connections because I couldn't spark the market without enough good quality companies and investors. And timing because angel investing really boomed in 2010

SAI: Right. So let's talk about that. This is the BUBBLE BUBBLE BUBBLE question. You're one of the people in Silicon Valley with the best view of angel investing; what's going on there?

Ravikant: There's no question that prices and valuations have shot up. There's a couple reasons. Number one: VCs are seed investing, and they are less price sensitive. Number two: there's a lot more money around in general and lot less opportunities to deploy it. Traditional investments like real estate and bonds are poor asset classes.

So there's a global macro bubble in safe haven sectors, and oddly, a diversified portfolio of startups suddenly seems relatively less risky to say, government bonds, than two years ago.

And a third reason is that entrepreneurs are getting more done before they raise cash, thanks to free leverage from the iOS, Android, Facebook, Twitter, Google, Amazon, etc., so they've made more progress and created more value before the money shows up.

But there's no giant macro bubble in early stage startups. There just isn't enough cash. Even if every early web startup blew up, it would have no immediate effect on Ben Bernanke's dashboard. It wouldn't warrant a single bailout. The total additional capital invested in early-stage went up by $500 million to $1 billion. That's just one small hedge fund or large VC fund.

So there isn't one big bubble. But there may be lots of small bubbles.

One thing that might be worse is that this time, $10 million might be scattered across 20 startups, whereas last time it was in one or two. So the number of companies failing will be a lot higher, even though the wealth and employment impact will be the same. But it'll just look really bad in the headlines as company after company goes out of business, even if they're all just 2-4 person shops of 18-25 year olds who would have been working in bad jobs otherwise.

So a positive outlook might be that since most VCs and angels lose money, we've found a way to efficiently tax the rich to fund the education of the best and brightest. Because these young entrepreneurs are getting an education better than any grad school; instead of having to go get jobs, they're expected to create jobs, instead of paying they're getting paid and instead of learning, they're researching, creating, teaching.

SAI: That's true. So you do think valuations will come back to Earth?

Ravikant: They have to, to some extent. Valuations may stay up but the number of companies getting funded has to come down. There are too many silly no-exit, just a feature companies getting funded.

Valuations may stay up but the number of companies getting funded has to come down. There are too many silly no-exit, just a feature companies getting funded.

SAI: So, valuations are starting to settle down, they'll stay high, but there'll be less startups. Is that a good summary?

Ravikant: I think, but I'm really not that sure. I can't predict markets, and neither can anyone else. Come to think of it, I'm not even sure there'll be less startups, actually.

The only real comment I can make is that the market valuations and number of investments have gone up. The entrepreneurs have gained leverage and power. Which is likely to lower returns for investors.

SAI: Pivoting (no pun intended) to another topic -- how many VCs want you dead?

Ravikant: Hey, I'm sending them good deals all day long. We've gotten about half a dozen Series As and Bs done now on AngelList, and we have 400 happy VCs on the list.

I guess it depends on the VC. If you have no differentiation, if you're just money, then yes, you're in trouble, because we're commoditizing access to startups. But if you have a brand and a reason that the startups want you, then you're fine. Even better off since you're getting matched up.

There are startups getting funded that Silicon Valley VCs wouldn't fund, but they're getting funded by VCs who aren't part of the Silicon Valley club.

And a lot of great companies are now coming out of unexpected places, like Groupon, Foursquare, Skype and others that are violating the deeply cherished and somewhat arrogant belief that only the Valley can produce huge companies.

The startup world is flattening, thanks to the web. Thanks to AngelList, I see geographic hotspots bubbling. We've received great companies from Estonia, there's a vibrant startup scene there. There's also lots of good ones from Chile; "Startup Chile" is cranking them out.

These startups are hitting local markets with local teams and Silicon Valley-class products, but they need investment.

SAI: What do you think of Bryce Roberts leaving AngelList and saying you guys encourage a herd mentality?

Ravikant: We aren't gatekeepers. Any angel on AngelList can share any company with anyone who follows them. And we don't espouse a particular style of investing.

Social proof is just one of four things we look at. We put just as much weight on traction, team and product. Strength in one-two of those is usually enough for me to share a startup with my followers.

So to me this is much ado about nothing. We're trying to stay focused on execution, which is all that matters. There are startups that rely on us and these distractions are a disservice to them.

SAI: Another question has to do with potential conflicts of interest. You're a "superangel" yourself and you're matching up startups with other investors. How does that work?

Ravikant: That's right, I'm an investor in 50 companies. But here's the thing: I don't really invest anymore. Once in a blue moon, maybe. I'm too busy with AngelList, and I likely will never raise another personal fund.

Secondly, I don't even talk to most of the companies I've invested in and I'd never give them a competitor's info. Thirdly, I've gotten dozens of companies that are competitors to ones I'm in funded. Fourthly there's a team of us who look at them. And finally, we tell the startups not to put up sensitive info anyway.

Honestly though, no startup seems to care. It's the MySpace generation. It's all out in the open. Investors talk. Might as well go in with your eyes open.

Here's what all the startups look like. As you can see by the numbers, there's lots of activity on AngelList.